Necessity is the mother of innovative financing. While this is not the exact quote attributed to Plato, it captures the wisdom of the philosopher as well as a message that PricewaterhouseCoopers has for the junior mining sector.
“Companies must take action – quickly and creatively – to find the cash to keep their projects alive and moving forward,” the global consultant recently penned in a brochure called Junior Mine 2015.
While most prognosticators agree that we are at or near the bottom of a bear market that has mauled the mining sector for nearly five years, recovery is expected to be slow and arduous for exploration companies seeking the next generation of mines that desperately need to raise funds.
“Is a recovery going to happen soon? Probably not. Is it going to happen? Absolutely, positively. There’s no way around it,” Rick Rule, president, and CEO of Sprott US Holdings Inc. wrote in a recent column for MicroCap Review.
While PricewaterhouseCoopers agrees that the markets will eventually recover, it advises the junior mining sector against trying to outlast a potentially extended bottom in the market before raising the money.
However, with equity hard to come by, the global advisor said junior miners need to think outside of the box when it comes to raising the cash to not only keep the lights on but to go out and discover and delineate the mineral deposits that will increase company value ahead of the upturn in markets.
“Boards and management teams need to set everything else aside to embrace creative solutions that keep their businesses, mines and assets moving forward,” the firm wrote in its advisory presentation.
Downward trend
The average market capitalization of a group of top mining explorers tracked by PricewaterhouseCoopers has plummeted 51 percent over the past year. While this drop is substantial in and of itself, it comes on top of large losses already endured by the sector.
SNL Metals & Mining reported in October that the market capitalization of 2,684 publically listed companies that it tracks is down to US$934 million in October, or about 39 percent of the peak of US$2.4 billion reached in 2011. For perspective, these 2,684 mining companies are valued less than Apple Inc. and Google, whose combined market capitalization is about US$1.1 billion.
The mining research firm said that only 12 exploration companies completed financings in September, the lowest monthly total since January 2012.
PricewaterhouseCoopers, however, points out some bright spots in an otherwise gloomy junior mining sector.
“Despite the downward trend, we have seen some real comeback stories this year – those junior miners who have moved from simply keeping the lights on to breaking with convention and transforming their business have given us a glimpse into what could be a more optimistic future,” said Liam Fitzgerald, Canadian mining leader for PricewaterhouseCoopers.
Unorthodox financing
Among the companies breaking with convention are two Vancouver B.C.-based juniors looking to develop world-class copper assets in Alaska – NovaCopper Inc. and Northern Dynasty Resources Ltd.
Aside from endeavoring to develop world-class copper deposits in Alaska, these junior miners have another commonality – they have both bolstered their treasuries by buying fellow junior companies with market caps less than the amount of money they have in the bank.
“In the current market, it is not uncommon to find firms trading below their cash value. Junior explorers willing to think differently about how to finance their business can take advantage of this opportunity to access much-needed capital,” PricewaterhouseCoopers explained.
NovaCopper was the first to embrace this unorthodox technique of raising money when it bought Sunward Resources Ltd., an exploration company with US$20 million in the bank but a market cap hovering around US$13 million.
Considering the state of the junior mining sector, NovaCopper President and CEO Rick Van Nieuwenhuyse said, “We felt this is the best financing alternative, with the least amount of dilution.”
With a flush treasury, NovaCopper could continue to explore and develop its Upper Kobuk Mineral Projects, a large northern Alaska property with nearly 10 billion pounds of high-grade copper identified to date.
While NovaCopper has plenty of cash to rapidly push through a prefeasibility study for Arctic, the most advanced of the Upper Kobuk Mineral Projects, the explorer has decided to take a slower and more diligent approach to advancing this copper-rich volcanogenic massive sulfide deposit towards development.
“You don’t have to be in a hurry to get a prefeasibility study done in six months,” Van Nieuwenhuyse told PricewaterhouseCoopers. “You can take six months or two years. This feels like a ‘take your time’ kind of market.”
The NovaCopper leader also advised not getting in a hurry to buy out another company that may have hidden issues you will have to deal with down the line.
“You want to make sure you get what you pay for – and nothing you’re not expecting,” he advised.
It is for this reason that PricewaterhouseCoopers urges junior mining companies to be proactive in coming up with financial solutions.
“(F)irms should act now, not later – attempting a transaction in a moment of crisis or desperation can lead to hasty decision-making, increased risk and less than optimal deal terms,” the consulting firm wrote.
Northern Dynasty has entered into two similar buyout deals that are expected to add about C$14 million to its war chest, a fund that will be used largely in an ongoing legal battle aimed at derailing the U.S. Environmental Protection Agency’s efforts to severely limit or stop the development of the world-class Pebble copper-gold-molybdenum project in Southwest Alaska.
In August, Northern Dynasty reported plans to issue about 12.9 million shares to buy Cannon Point, a junior explorer with C$4.7 million in cash and cash-equivalents at the end of June.
In October, the Pebble owner unveiled a second deal to issue 27.8 million shares to acquire Mission Gold Ltd., an exploration company with C$9 million in cash and full ownership of the Alto Parana titanium project in Paraguay. As a condition of closing the buyout, Alto Parana will be sold to a third party on terms acceptable to Northern Dynasty.
Given the extremely low valuation that markets are giving the junior mining sector, other such marriages may be waiting.
“Companies with good assets but little cash – or with cash but assets that aren’t economical in the current market – may well find that an acquisition provides a win-win that enables each firm’s shareholders to keep moving forward,” advised PricewaterhouseCoopers.
De-risking projects
De-risking projects through partnerships is another tidbit of advice that PricewaterhouseCoopers offers junior miners that may not be able to raise money through traditional equity financings.
“With the right partners, de-risking strategies can enable miners to monetize assets, retain an interest in a project and gain the cash needed to keep balance sheets strong – and options open,” the advisor explained.
The merging of two or more companies is another way in which junior miners can lower overhead costs and lower the risks of losing the assets these companies worked so hard to build.
“Given the current market dynamics, aggregation represents a natural progression and a highly pragmatic strategy for many Canadian junior mining companies,” PricewaterhouseCoopers explains. “It may require teams to set aside their personal egos and ambitions, but in the long run it will strengthen the sector overall.”
Whatever innovative finance strategy is employed, PricewaterhouseCoopers urges the sector to act now.
“Junior miners need to take urgent action – now, before crisis hits – and do what it takes to find the cash to keep their businesses and projects moving forward,” advised the global firm.
“The market will recover, eventually. And companies that take action now will be far better positioned to succeed when it does,” it added.
